State official questions Hampton police spending

One of Virginia's top government accounting officials is questioning whether Hampton police had the authority to spend money without the City Council's authorization in a long-term undercover cigarette sting operation.

Walter J. Kucharski, Virginia's auditor of public accounts since 1984, said that under state law, any public money controlled by the city — including money that doesn't come directly from taxpayers — is the City Council's to spend, not the Police Department's.

Moreover, he said in a recent interview, the council should have been informed sooner rather than later about the cigarette company's bank account, which as of Aug. 31 had a balance of $718,496.

"You're telling me that there were almost three-quarters of a million dollars in the account, and no one told the City Council that the money was there?" Kucharski asked. "What if they wanted to use it to plug a budget hole somewhere?"

Several council members have said that they didn't know anything about the money in the police division's cigarette company, Blue Water Tobacco, until the Daily Press told them about it eight months after the operation had ceased.

Among other things, he and his staff at the Auditor of Public Accounts, in Richmond, compile audits from around the state, run annual budget comparison reports on local governments, and issue audit specifications and manuals to ensure the quality of financial statements from governmental bodies statewide.

"In my 36 years doing this and working with local governments and police departments around the state, I have never seen anything seen like this," Kucharski said. "I don't know what authority they had to A, conduct this investigation, and B, to spend that kind of money."

Under state law, Kucharski said, public money can only be appropriated by a jurisdiction's governing body — or the City Council in Hampton's case. If someone makes a purchase without such an authorization, he said, the council can demand the money be repaid out of the employee's own pocket.

City Manager Mary Bunting said in an email that the Hampton Police Division had never previously run an undercover company on its own.

Though the effort began in June 2010 as a joint operation with the federal bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), Hampton continued the operation after the feds backed out months later.

Bunting said that Hampton always acted with the assurance that it had the proper financial authority in place.

"This is the first time that we have conducted such an operation on our own, and we only did so because we were asked to continue efforts that had begun (to curb) what is a clearly documented and growing problem," she said, referring to the burgeoning problem of interstate cigarette trafficking.

"We sought multiple layers of assurance (from other agencies) before continuing with the operation," she said.

Hampton, Bunting said, "came away from those consultations with a reasonable belief" that the police department had the authority to conduct a "churning" operation, she said. In such accounts — which have very strict rules if conducted under federal authority — profits derived from an investigation are plowed back into the investigation.

The City Council wasn't told about the cigarette investigation, Bunting said, in part because it was an undercover police operation.

"It is imperative to minimize the number of personnel with direct knowledge of those operations so as to not risk inadvertent identification of the operation and/or the officers engaged in that operation," she said in an email. "Inadvertent release of such information could not only compromise the public safety goals but also the officers themselves."

Cash-rich operation

The Hampton Police Division ran an undercover cigarette business for a year-and-a-half, in a sting designed to crack down on black market cigarette trafficking. That includes such things as people buying cigarettes in low tax states and bringing them to high tax states for resale — as well as related crimes.

Over the 19-month operation, the Hampton officers did not make a single arrest or file any criminal charges.

But more than $3 million flowed through the account during the course of the operation. Some of that money — or $394,341 — was spent on new vehicles, city documents show, with sources saying some of those cars were unmarked SUVs.

Among other expenses, at least $19,284 was spent on officer training trips to such places as New York, Washington, D.C., and Las Vegas; and $33,490 was spent on electronics and other equipment, according information provided by the city.

Though the ATF had initially suggested the sting operation in 2010, the agency backed out after the Hampton officers discovered an ATF agent was having private side discussions with a cigarette buyer. The agent, Clifford Posey, is now serving a three-year prison term in West Virginia.

When the ATF backed out of the operation in late 2010, it left to Hampton the entire $765,779 that was in the tobacco company's account.

Kucharski asserted that all public money — including money from an outside entity such as the ATF — needs authorization from the City Council before it can be spent.

He cited a state statute, which reads: "No money shall be paid out or become available to be paid out for any contemplated expenditure unless and until there has first been made an annual, semiannual, quarterly or monthly appropriation for such contemplated expenditure by the governing body."

At the very least, Kucharski said, that means that the initial money put into the cigarette operation — such as the $765,779 the ATF left in the account — could have been properly spent only by way of a Hampton City Council vote.

There was never such an appropriation in this case, council members say.

Kucharski said the money generated in the course of the investigation — which Hampton spent to buy more cigarettes and cover all other expenses — could also well require council appropriations. But he didn't want to weigh on that definitively because he's never seen a similar situation in his decades in office.

'Gift' from ATF?

For her part, Bunting asserted that the money that initially funded the cigarette operation was a "gift" from what she termed a "private entity."

She did not respond to questions about whether the cash the ATF, a federal agency, left in the account was the "gift" from that "private entity." She did, however, cite a city ordinance that gives her, as the city manager, the authority to "approve and accept" gifts.

"The city manager may approve and accept gifts to the city ... donated in furtherance of immediate public safety administrative or operational needs," the city ordinance reads. "The city manager shall report to the council as soon as practicable the acceptance of such gifts valued at five thousand dollars ($5,000.00) or more and shall ensure compliance with any conditions pertaining to such gifts."

Bunting asserted that the ordinance amounts to the council granting its "prior authorization to spend (i.e., appropriate) cash gifts under the limited circumstances described in the ordinance."

Further, she wrote, "any proceeds that were derived from the use of that gift" through the undercover police cigarette company "is akin to evidence or fruits of criminal activity," and is not generated for appropriation "in support of government services."

That makes it a matter of state forfeiture law, Bunting said.

"The funds were spent in execution of the furtherance of the criminal investigations with the understanding that, once all related investigations were completed, any balance would be dealt with by the Commonwealth Attorney's Office in accordance with state forfeiture laws," she said.

Moreover, Bunting said she and the City Attorney's Office jointly determined that the 2010 gift didn't have to be immediately reported to the council.

"We determined that the report (on the) accepted gifts would coincide with the close out of undercover operations and related investigations," Bunting said. "While this particular Hampton undercover operation has concluded, related investigations continue."

Questions about forfeiture

Kucharski, however, disagreed with Bunting on several counts.

His reading of Hampton's ordinance, he said, is that the city manager can approve and accept a gift. But the language doesn't give anyone the pre-authorization to spend it, he said. There are important reasons — including liability and policy reasons — for the council to sign off on all expenditures, he said.

"I'm having a hard time getting past that it's a gift," Kucharski said.

"But assuming for the sake of argument that it's a gift, a gift would still have to be appropriated (by the council)," he said. "What if the terms of the gift are that you build a school for people who are left handed from Hampton and you have to staff it and keep that school going forever. Would you take that gift if you were on the city council?"

As for Bunting's statement that the money taken in by the cigarette company is a matter of forfeiture law, Kucharski said courts and judges — not police and prosecutors — determine whether seized cash or private property must be forfeited.

If the money from an undercover account is indeed "evidence or fruits" of a criminal enterprise, Kucharski said, the legal status of that money needs to be determined by a judge in court before it can be spent by the cops in an ongoing way.

Kucharski said it's up to several fiduciaries — including city councils — to ensure adequate financial controls are in place to curb abuse. "I don't care who it is," he said. "Any time you provide an unoverseen opportunity that money can be taken, inevitably at some point it is."